Q3 Performance That Blew My Mind

Last night I got an email with a Q3 sales update from a company I’m an investor in for a while. They consistently meet or beat their plan and are an extremely well managed business. Their plan for Q3 was aggressive in my book (and they’ve managed their costs to a lower outcome) had an expectation for what they would come in at based on data from as recently as last week. I knew what they thought the upside case was and didn’t believe it so my brain had locked in on a number slightly below or around plan.

I’ve found that the Q3 number is often the hardest to make when you budget on an annual basis – Q1 is easy since you have a lot of visibility, Q2 is harder, but doesn’t have as much growth built in as Q3, then you have a heavier growth quarter with the summer doldrums (Q3) followed by the insanity that is Q4 in the annual cycle. So I usually view Q3 as “hard to beat; challenging to make.”

This company destroyed their number. They beat plan and came in at the upside case. They ran the table on new business. It was awesome to see. And it blew my mind, in a pleasant way, as this is a humble company that doesn’t overstate where it’s going.

As we enter Q4, I systematically look at the performance of every company I’m involved in for two reasons. First, I want to make sure I understand the real trajectory as they exit the year as Q4 is often an outlier, usually to the upside, as a result of end of year purchasing. I also rarely pay much attention anymore to Q4 plans as they are almost always obsolete and instead focus on the cost / burn dynamic in Q4.

It’s harder to calibrate in cases like this when a company far exceeds their Q3 plan. It’s equally hard in the other direction when a company misses their Q3 plan. And it’s really challenging when there is a big step up for Q4’s plan when you start going into the 2013 planning cycle.

I’m curious how y’all approach this, both entrepreneurs when they are thinking about their own planning as well as investors / board members when they are reacting to the early data from Q3 and thinking about Q4 and 2013.

I do annual budgets based on the most likely known data and then show where the upside might occur and when. I’m very conservative by nature and, partly due to being raised without much money, always worried about cash. I adjust these numbers based on new data on a monthly basis, which means by the time I reach any given quarter, my estimates are stronger. Since I budget the current year and the next fiscal year, those changes give me a long-term window as well, so I have a pretty decent idea of where things lay over a longer window. As a part of my annual budgeting process, I look back over the previous year to see how close I was at the beginning versus where we ended up. This hones my prediction skills.

Its that an interesting approach. Phil Jackson, the legendary coach of the Chicago Bulls and LA Lakers used to say that the 3rd quarter was the most important. By getting ahead in the third quarter, the fourth quarter becomes less pressure filled.

When I coached lacrosse, we took the same attitude. And, as we build Graphicly, our goal is to not have Q4 be the “saving grace” to hit our annual goals.

Good example. I’ve learned you almost can NEVER make it up in Q4. If you are behind in Q3, you will end the year behind and it’s better to get ahead of things on 10/1 rather than wait until 1/1 and hope something good happens in Q4.

So, why did they beat plan? Is/are the reason(s) transitory or permanent? A great team is much harder to compete with in the long haul than competing with a great product now. The competition might react strongly to what this company has achieved in Q3, so planning for Q4 and beyond should definitely take that into consideration.

In cases where you have an expodetial growth rate, the forecast for Q3 (vs a Q1) of a sales number is more suseptical to a blowout for two time related reasons: its drift (growth rate) and its volatility are both a function of the the information at time (t). Noteably, the volatility is a funtion of the square of the sales.

A lot depends on the age of the company and industry the company is operating in. However year-over-year growth is what we (Simply Hired) look at to normalize for cyclicality. We’re now old enough to have the right amount of industry cyclicality built into our projections and year-over-year growth rates will tell you whether or not the company is accelerating growth.

Also, in general, a large aberration from the initial annual projections is enough to make the projections moot for the rest of the year. I believe well managed companies should revise their projections on a semi-annual basis (or quarterly if the aberration is big enough).

As investors, what you want to make sure doesn’t happens is that the company sticks to current projections and company coasts for the remaining quarter(s). If the company’s leadership doesn’t have a good reason for not revising projections upward, its a possible sign of lack of confidence their past quarter’s growth is sustainable.

you’re mapping a general goal approach behavioral pattern (and experience knowledge) into sales quarters. micah points this out w/ the basketball scenario. I’ll map it into our tighter grained sales weeks in a month. week 1 is either a bye-week b/c you killed the previous month, or you’re recovering and working your ass off to solve a flubbed previous month. once week 1 is behind you, 2 is even paced from month to month. week 3 is “let’s crush the month and close a ton so we’re not scrambling w/ our backs against the wall in week 4; the last week.” week 4 for is gravy if you nailed it in week 3, or a mad dash to meet the goal for the month.

quarters 1 and 2 are “normal.” quarter 3 is where you crush everything to have the goal (whatever it is) bagged. quarter 4 should be gravy. people that live and exist only in q4 and make everything happen there scare me. if you miss, you’re hosed for the whole. it’s fun and on the edge, but too high-stakes. q3’s the sweet spot. it’s the thing after a calm/collected/calculated state, but before your back _may_ be up against a wall.

I like focusing everything in life in q3 (not calendar year speaking… just the third quarter of a “whole” effort), but having the skill/experience to perform under harsh circumstances in a potentially nasty q4. you want to avoid the fight for your life in an ugly q4, but you also need to be able to win that fight when it (inevitably) comes up.